True story: I spend little time managing my investments. I prefer it that way — there are so many other things I’d rather do with my time than tinker and trade in my portfolio.
This low-maintenance approach relies on an investing tip I’ll share until I’m blue in the face: Invest for the long term. I admit those five words may not seem specific enough to be useful or applicable to your own investing practice. But if you stick with me, I’ll explain what it means to have a long-term focus and why it’s so useful.
How to take a long-term approach
There are two elements to long-term investing. You start by purchasing quality stocks and/or funds. And then, you hold those quality positions through market downturns.
Buy quality stocks and funds. Good companies grow their value over longer periods of time. There may be dips and spikes along the way, but the long-term growth trend should be positive.
You can decide what defines a “good company” according to your investing expertise. For core holdings in my portfolio, I like to see an experienced leadership team, solid balance sheet, loyal customers, and diverse revenue streams.
Hold through market downturns. Stocks can lose value for different reasons. If a stock I own loses value because something at the company has fundamentally changed, I’d consider selling. But if a stock loses value because the market overall is down, I’m holding that position. I might even buy more while the share prices are lower.
My rationale for not selling when the share price falls is simple: I bought a good company, and good companies recover on the other side of market downturns.
Advantages of long-term investing
As for the advantages of long-term investing, two that matter to me are greater efficiency and reliability.
Long-term investing is more efficient. Long-term investing is efficient, with respect to my time and my taxes. I’m not trying to turn a quick profit, so I can worry less about what the market is doing right now and other details that won’t be relevant in a couple years. I also don’t have to hunt constantly for new stocks to buy because I have my favorites and I don’t often sell.
Instead, I can focus on big-picture things — namely, do my positions still fit my definition of quality?
With respect to taxes, my realized capital gains are low because I’m holding rather than taking profits.
Long-term investing is more reliable. If you want to test this out anecdotally, watch the short-term movements of a single S&P 500 stock like Apple. See if you can find a pattern. Sometimes, a piece of news pushes the share price one way or another. But often, there’s no obvious reason for a change.
Now look at the same stock over, say, 10 years. You’ll still see ups and downs, but a more defined trend will emerge. For most S&P 500 companies, that trend will be growth.
Personally, I’d rather rest my earnings potential on the more predictable outcome of long-term growth versus immediate price fluctuations I don’t fully understand.
Do less, get more
Investing for the long term can generate better returns, even as you spend less time managing your portfolio. Unless you truly enjoy the hunt for good investment opportunities, earning more while doing less should be a win-win.
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Catherine Brock has no position in any of the stocks mentioned. The Motley Fool owns and recommends Apple. The Motley Fool recommends the following options: long March 2023 $120 calls on Apple and short March 2023 $130 calls on Apple. The Motley Fool has a disclosure policy.